If purchasing power parity holds and the nominal exchange rate is 1pound for 1.5 dollars, how much should a KFC bucket cost in London if it costs $8.50 in Chicago? EXPLAIN AND SHOW WORKINGS (15pts)
2.If the Federal Reserve increases the US money supply, what will this do to the value of the US dollar compared to the euro? (15 points)
3.A French company opens a new plant in Idaho. How does this affect the US current account and capital account? EXPLAIN (15points)
4.Select an answer from A-D and explain why your selection is most likely the correct answer.(5points)
Samuel, a U.S. student, is preparing for a trip to Thailand in the near future. He read in TheWall Street Journal that the dollar has strength against the Thai baht. Which of the following would be an exchange that would indicate this currency situation?
A. 10 U.S. dollars for 1 baht.
B. 1 U.S. dollar for 1 baht.
C. 1 U.S. dollar for .22 baht.
D. 1 U.S. dollar for 34.78 baht
- Robert Solow once jokingly noted, “I have a chronic [trade] deficit with my barber, who doesn’t buy a darned thing from me.” Is this a problem? Why or why not? How does this relate to the U.S.–China, U.S.–Mexico, and U.S.–Japan trade deficits? EXPLAIN (20 points)
- At Christmas, seven-year-old Isabel runs a massive trade deficit with her parents: She “exports” only a wrapped candy cane to her parents, but she “imports” a massive number of video games, dolls, and pairs of socks. EXPLAIN (20 points)
- Is this trade deficit a good thing for Isabel?
- When Isabel turns 25, her parents insist on being repaid for all those years of Christmas presents—that is, they require her to run a “trade surplus.” Is this “trade surplus” good news for Isabel? Why or why not?
- If the price level of the US doubles, while the price level in Japan remains unchanged. According to purchasing power parity theory, would the dollar/yen nominal exchange rate double or would it fall in half? EXPLAIN (10 POINTS)